Thursday, January 1, 2015

A New Year's Resolution Worth Keeping ... Financial Tips for That 'Rational' Person Within Each of Us

Happy New Year! 2015 is here and 2014 is officially in the history books. For individual investors, the stock market turned in another positive performance as the S&P 500 gained 11.4% in 2014, and 13.68% when dividends are included, following on the heels of a huge ~30% gain in 2013.

And now it's on to 2015. So here's my proposed New Year's resolution for all of us individual savers and investors as we try to navigate our way through the challenges, surprises and happenings of 2015 and beyond --- that we will act rationally and make informed financial decisions.

Over many years, it's become obvious to me that many important and life changing financial decisions that individual savers and investors make aren't rational. Instead emotions take over and this often works contrary to our best interests. It's a buy high and sell low mentality, often 'aided' by self serving financial advisers, stock brokers and other sellers trying to convince us to part with our money and give it to them.

This "persuasive selling" is simply a fact of life whenever people are trying to sell us whatever it is that they are selling, whether it be student loans, credit card purchases, cars or homes, As the accompanying article points out, suckers aren't born --- instead we're enticed by self interested sellers. And that's why acquiring personal financial literacy and adopting a caveat emptor attitude, aka let the buyer beware, are necessary 'assets' for individuals to invest in and develop at an early age.

2015 investing tips for the rational investor is well worth reflecting upon as it contains many truisms for all individual investors and other buyers as well:

"Now is the time of year when pundits put forth their market prognostications for the coming year, ballyhoo their favorite stocks and dazzle readers with can’t-miss strategies and trends.
So here are a few words to the wise . . . .
  • The future will be full of surprises — count on it. No one can see through the curtain that separates today from tomorrow so avoid those who predict the future without divine inspiration.
  • Hard times lie ahead, so do good times. This should not frighten you but it’s why your financial planning and investment strategy must be flexible enough to accommodate both outcomes.
  • Speculation is the sport of fools. The success of a fool doesn’t prove that his course was wise or guarantee that his success will continue. Luck can bring temporary success but time is the ultimate judge of all speculations. . . .
  • Suckers aren’t born, they are enticed. Never forget that a large commission, a bad investment and a small conscience are often found in close proximity to one another. . . .
  • Don’t invest your retirement assets based on your worst fears — it’s a sure recipe for failure. Rather, focus on what is probable and move forward. Distinguishing between what is possible and what is probable will eliminate many investment mistakes. . . .
  • The wealth of a nation lies in the minds of the citizens, not in its natural resources or the gold in its vaults. . . .
  • The dominant emotion in investing is fear. It can overcome the weight of the historical evidence and all intelligent analysis.
  • Your investment life should be boring — make the rest of your life exciting.
  • Patience is the most important ingredient in wealth accumulation. This, sadly to say, is one reason why so few people are wealthy.
  • We live in an age of information overload. None of the cacophony emitted by the financial media will give you an edge in the market because all the information is already factored into asset prices.
  • After subtracting the costs of management fees, trading expenses and taxes; most mutual fund managers don’t add value — which explains why their average tenure is about five years. They’ll never admit that most of what they do is just speculating with shareholders’ money.
  • Wall Street’s big names will continue with business as usual in 2015, efficiently transferring client wealth to their own accounts.
  • The beneficiaries of all those “What to buy in 2015” articles in financial publications are more likely to be advertisers, not readers. If you come across an article entitled “2015– Another Good Year to Buy Index Funds,” you’ll know things have changed.
In 2015, investors will once again have the opportunity to receive the market's return with little effort and almost no cost. Don't pass up this golden opportunity.

The ending value of a continuously funded, globally diversified, annually rebalanced indexed portfolio over an investing lifetime will be greater than most investors can imagine and which few stock pickers or market timers will ever achieve."

Summing Up

I especially like the suckers aren't born but enticed piece of advice. To most sellers, it's all about getting the buyer to part with his money.

So always be careful when confronted with all the self interested 'enticers' that are out there.

Let's resolve in 2015 to act rationally when making personal financial decisions of all kinds. 

That's definitely a New Year's resolution worth both making and keeping.

Happy New Year. Bob.

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